Islamic vs. conventional funds: a comparative analysis over the financial crisis - evidence from the middle east

The findings of over-or-under performance of fund managers across the crisis periods are mixed. By analyzing the monthly data for 90 mutual funds chosen from ‘Kuwait, the United Arab Emirates, the Kingdom of Bahrain, Qatar, and Sultanate of Oman’ as a-five-Gulf countries, this paper employs Jensen’s alpha and Treynor & Mazuy models for the period of 2007-2012 to offer a comprehensive investigation for the fund managers’ capabilities of market timing and selectivity. It explores these two skills during and after the Financial Crisis (FC) period of 2007-2008, in addition to inspecting the relative differences in performance between equity conventional mutual funds (CMFS) and Islamic ones. The results show no evidence of over-or-under performance even for the overall period of 2007-2012 or for the down-market period of 2007-2008, where there are no structural changes for the regression line across the two sub-periods. But, it reveals the superiority of equity CMFS performance in Kuwait alone, where, the results of the cross-section analysis for the differences in means and standard deviations of Alpha and Beta coefficients are statistically significant for the overall period. Thus, it seems that if the investors cannot gain superior returns by investing in the Gulf mutual funds in general, they may attain a comparative advantage by investing in the conventional funds against the Islamic ones especially in Kuwait. It also implies that the ethical screening, which is adopted by the Islamic funds of Kuwait, already limits their diversification opportunities and then adversely affects their performance.